Classification of costs

The classification of a cost varies according to the use of resource and the purposes of the classification. Labour, for example, can be classified in a variety of ways.

· Labour employed in the production of a good or service is a direct cost.

· Labour employed in selling a product is an overhead, unless of course that labour is employed in retailing, when it may be classified as a direct cost.

· Labour which can be laid off when output falls can be classified as a variable cost. A production line worker might be classified as both direct labour and as part of variable costs.

· When agreements between management and unions make it impossible to lay off labour then labour costs must be regarded as fixed for the period of time covered by the agreement. This situation might also arise if management has a policy of continuous employment.

2.Comprehension check.

Working in pairs, answer the questions:

a) Distinguish between fixed costs and variable costs.

b) Can you give your own example of semi – variable costs?

c) What is the difference between direct cost and indirect costs?

d) What costs belong to overheads?

e) How are marginal costs calculated?

f) What is the definition of imputed costs?

3.Solve the problem.

Given that a business can produce 150000 items in a month; its fixed costs per month are £ 10000; the average variable cost is £ 5 per unit and it is operating at full capacity. What is the cost per unit? Calculate the total production costs.

*4. The owner of a business described in task 3 wishes to make a profit equivalent to 25 per cent of production costs. At what price should the output be sold?

5. Sketch a variable cost curve to show what happens when unit variable costs decline as output increases.

*6. State one problem a business might experience in deciding on imputed cost.

7. Read the definitions below, then complete the phrases that follow by combining an appropriate word from the box with cost (s).

price manufacturing fixed operating

variable labour selling analysis sales

1 Usual expenses such as rent, heating, lighting, which are not changed by the volume of production. ………….. costs

2. Expenses which increase with increased production, e.g. labour, raw materials. ………….. costs

3 All costs directly related to production. ……………… costs

4 All costs directly related to getting someone to buy a product. ………. costs

5 The cost of employing workers and staff. ………………. costs

6 The costs for the day-to-day running of a company or business. ……. costs

7 Selling at a price which is exactly what the product has cost to make.

cost ……………..

8 The study of all likely costs associated with a product. cost……

9 The total costs for all products sold. cost of…………

Pre-reading task

The words and word combinations in the box make a key vocabulary of the text you are going to read. Use your dictionary if necessary.

What is this text about?

break – even point selling price

the lowest possible output intersect

revenue total profit

irrespective of similar

curve calculation

origin total losses

equation margin of error

vertical axes